Tag Archives: forex

Several Ways To Trade Currencies, Some With Lower Tax Rates

February 25, 2017 | By: Robert A. Green, CPA

Forbes

Several Ways To Trade Currencies, Some With Lower Tax Rates

There are several ways for American retail traders to trade “currencies” and tax treatment varies.

1. U.S. regulated futures contracts
U.S. futures exchanges list the major currency pairs as regulated futures contracts (RFCs). Open a retail account with a CFTC-registered Futures Commission Merchant (FCM).

Currency RFCs automatically have Section 1256 tax treatment with lower 60/40 tax rates. Section 1256 requires mark-to-market (MTM) accounting, which means reporting realized and unrealized capital gains and losses. Because there is no way to generate a long-term capital gain with MTM, Congress agreed that 60% is a long-term capital gain, and 40% is a short-term capital gain, no matter of holding period. (See Section 1256 tax rates vs. ordinary rates below.)

2. Leveraged forex contracts off-exchange 
Most American retail traders open accounts with a CFTC-registered Retail Foreign Exchange Dealer (RFED) or an FCM Forex Dealer Member. (See Learn Why The NFA Barred FXCM And What It Means For Forex Traders.)

By default, foreign currency transactions, including spot and forward forex contracts are Section 988 ordinary gain or loss tax treatment. A forex trader may elect capital gains treatment, which on short-term capital gains is the ordinary tax rate. If a forex trader doesn’t “take or make delivery” in cash, there is a case for using Section 1256(g) (foreign currency contracts) on “major” currencies. (See A Case For Retail Forex Traders Using Section 1256(g).)

3. Currency exchange-traded funds (ETFs)
Structured as Registered Investment Companies (RIC) listed on a securities exchanges, ETF RICs are securities with short-term vs. long-term capital gains and losses treatment, using the realization method. Short-term capital gains are subject to ordinary tax rates, and capital losses are subject to the $3,000 capital loss limitation against other income.

4. Nadex binary options and spreads based on forex
Nadex is a CFTC-registered derivative exchange offering binary options and spreads. Nadex bases one of its binary options products on price movements in forex. It’s not a forex contract. Nadex issues a Form 1099B for Section 1256 contracts, but I have doubts about their qualification for using Section 1256 tax treatment. Nadex binary options and spreads appear to be “swap contracts” with ordinary gain or loss tax treatment. (Read Tax Treatment For Nadex Binary Options.)

Section 1256 tax rates vs. ordinary rates
The difference in the 60/40 blended tax rate vs. short-term capital gains taxed at ordinary rates is significant throughout the graduated tax brackets. The 60/40 rates vs. ordinary rates are:

4% for the 10% bracket,
6% for the 15% bracket,
19% for the 25% bracket,
20% for the 28% bracket,
22% for the 33% bracket,
23% for the 35% bracket, and
28% for the top 39.6% bracket

No matter what tax bracket you are in, there are significant tax savings using Section 1256.

Additionally, there is a Section 1256 loss carryback election, which can be used to amend the prior three years tax returns, offsetting Section 1256 gains only. Section 1256 has summary tax reporting. It’s a breeze tax-wise.

How To Report Forex Trades On 2016 Tax Returns & 2017 Planning

January 13, 2017 | By: Robert A. Green, CPA

Forex traders may have the best of both worlds: Ordinary loss treatment skirting the capital loss limitation, or lower 60/40 capital gains tax rates in Section 1256(g). Unfortunately, you have to choose in advance with an election.

Join forex tax expert Robert A. Green CPA as he explains:

- Off-exchange forex vs. on-exchange regulated futures contracts;
- Forex Section 988 ordinary gain or loss treatment;
- How to report Section 988 forex trades on 2016 tax returns;
- How to make a capital gains election to opt-out of Section 988;
- A case for using Section 1256(g) lower 60/40 capital gains tax rates on the main currencies and why it’s uncertain with the IRS;
- How to report forex using Section 1256(g);
- Rollover trades, interest and open P&L;
- Broker tax reporting, tax forms, and summary reporting;
- IRS and state tax notices questioning forex tax treatment;
- CFTC and NFA rules for forex.

 

Forex Tax Treatment 2016

January 18, 2016 | By: Robert A. Green, CPA

If you want a recording, we suggest the latest version: How To Report Forex Trades On 2016 Tax Returns & 2017 Planning

Join CPA and forex tax expert Robert A. Green CPA. In this GreenTraderTax Webinar, Mr. Green will explain how to handle forex trades on income tax returns including:

  • Forex spot, forward and OTC options;
  • Forex Section 988 ordinary gain or loss treatment;
  • Section 988 opt-out (capital gains) election;
  • Qualifying for lower Section 1256(g) 60/40 capital gains rates;
  • Tax return examples for Section 988 vs. Section 1256(g) forex tax treatment with trading gains vs. trading losses. Green shows you how he prepares tax returns for forex traders.
  • Reporting unrealized gains and losses with Section 1256(g);
  • Rollover trades, interest and open P&L;
  • Broker tax reporting, tax forms and summary reporting;
  • IRS and state tax notices questioning forex tax treatment; and
  • CFTC rules for retail off-exchange forex traders.

 

 

Forex Tax Treatment 2015

March 23, 2015 | By: Robert A. Green, CPA

If you want a recording, we suggest the latest version: How To Report Forex Trades On 2016 Tax Returns & 2017 Planning

Join Green NFH CPA and forex tax expert Robert A. Green CPA. In this GreenTraderTax Webinar, Mr. Green will explain how to handle forex trades on income tax returns including:

  • Spot, forward and OTC options;
  • Section 988 ordinary gain or loss treatment;
  • Section 988 opt-out (capital gains) election;
  • Qualifying for lower Section 1256(g) 60/40 capital gains rates;
  • Reporting unrealized gains and losses with Section 1256(g);
  • Rollover trades, interest and open P&L;
  • Broker tax reporting, tax forms and summary reporting; and
  • CFTC rules for retail off-exchange forex traders.

 

Learn How Active Securities Traders File Tax Returns For Maximum Tax Benefits

January 27, 2015 | By: Robert A. Green, CPA

Join trader tax expert Robert A. Green, CPA. In this Webinar,

  • Learn how to save thousands by claiming trader tax status (business expense treatment) on your 2014 tax returns.
  • While no election was required, you do need to qualify for trader tax status and you’ll learn the GreenTraderTax golden rules for qualification.
  • Learn how to deal with onerous wash sale loss reporting. If you trade stocks and stock options, and or have multiple brokerage accounts, you can’t rely on brokerage firm Form 1099-Bs for reporting wash sale losses correctly.
  • Learn how Section 475 MTM exempts active traders from wash sale losses and capital loss limitations. Learn how to make a timely Section 475 election.
  • Learn tax treatment: the differences between securities, options, Section 1256 contracts, ETFs and other popular trading products.
  • Learn the added benefits of trading in an entity, including unlocking employee-benefit plans like health insurance and retirement plan tax deductions.
  • If you don’t have a trading entity for 2014, learn how to set up the best entity and retirement plan for 2015.

We look forward to see you on the Webinar. Come with questions, Mr. Green will try to answer them.

Currency Trading Tax & Regulatory Treatment: Update After The SNB Shockwave (Recording)

January 22, 2015 | By: Robert A. Green, CPA

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Join Green NFH CPA and forex tax expert Robert A. Green in this Webinar.

If you are one of many who got caught on the wrong side of the forex trade when the Swiss National Bank (SNB) surprised the markets with a huge policy change, you probably incurred significant losses. In this Webinar, Robert Green CPA explains how to handle these losses on your tax returns. He also explains how you can elect to use lower Section 1256(g) 60/40 tax rates on gains.

First, it’s important to segregate your losses into two camps: the forex trading loss (Section 988 or capital loss) incurred on your open positions that were liquidated or closed by you or your broker, versus losing a deposit in an insolvent financial institution (Section 165). The latter also happened to traders who made money on this market event.

Green discusses money safety issues for account holders with forex brokers and ways to avoid this risk using other currency instruments to trade. Like trading currency futures on futures exchanges, currency binary options on Nadex, and currency ETFs.

Many American forex traders disregarded CFTC rules (for retail off-exchange forex) by trading with non-registered offshore brokers offering leverage far above CFTC limits of 50:1 on major currencies and 20:1 on minor currencies. Several offshore brokers and a few U.S.-based forex brokers are facing financial strain or insolvency as a result of offering excess leverage to their customers during the SNB shockwave. Green discusses leverage and regulation. If you trade currencies in any form you should not miss this important Webinar recording.

blog_post Tax treatment for forex and deposit losses after SNB’s surprise policy change

 

Tax Treatment Of Forex Losses In Wake Of Swiss Surprise

January 17, 2015 | By: Robert A. Green, CPA

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Webinar Feb. 10, 2015 at 4:15 pm EST - Learn More

If you are one of many who got caught on the wrong side of the forex trade when the Swiss National Bank (SNB) surprised the markets with a huge policy change this week, you probably incurred significant losses. Here’s a quick primer on how to handle these losses on your tax returns.

First, it’s important to segregate your losses into two camps: the forex trading loss (Section 988 or capital loss) incurred on your open positions that were liquidated or closed by you or your broker, versus losing a deposit in an insolvent financial institution (Section 165). The latter also happened to traders who made money on this market event.

Forex tax treatment
By default, forex trading losses are Section 988 ordinary losses, unless you filed an internal contemporaneous capital gains election at any time before this new trading loss was incurred. In that case, it’s a capital loss subject to capital loss limitations of $3,000 per year against ordinary income. With a capital gains election in place, if you trade major currencies and don’t take or make delivery, you probably use Section 1256(g) lower 60/40 capital gains rates.

If you qualify for trader tax status (business treatment), Section 988 losses are business losses includible in net operating loss carry backs and forwards. But without trader tax status, you’ll need other income to absorb the forex ordinary loss, because the negative income part is otherwise wasted. If you’re using Section 1256(g), you can file a net Section 1256 loss carry back election for 2015 to carry the loss back three years to offset Section 1256 gains in those years. (Read more about forex tax treatment in our Trader Tax Center).

Deposit loss tax treatment
Hopefully, other banks and brokers will rescue teetering forex brokers and not too many forex traders will lose their deposits in insolvent financial institutions. That would be unfortunate since there is no FDIC or SIPIC money-protection on forex accounts. If U.S. and foreign forex brokers fail, hopefully the firms have private insurance that pays out the deposit holders in full for their deposit losses. If there is less than full recovery of deposit losses through insurance or otherwise, sustained losses are subject to Section 165 tax treatment.

We addressed similar issues when we covered the MF Global insolvency and recovery efforts over the past few years.

Excerpt from our Trader Tax Center
Many investors, traders and hedge funds got sideswiped by the MF Global and PFG bankruptcies over the past few years. Unfortunately, futures and forex account holders are not afforded government protection like bank account holders with FDIC protection and securities account holders with SIPIC protection. Tax treatment is far better when the IRS declares the loss a “theft loss”and allows application of IRS Revenue Procedure 2009-20, originally enacted to provide tax relief for investors in the Bernie Madoff Ponzi scheme. Theft losses receive ordinary loss treatment plus acceleration of losses on tax returns. Otherwise, Section 165 applies to deposit losses in insolvent financial institutions like MF Global. Investors are stuck choosing between capital loss treatment, which may trigger capital loss limitations, or itemized deduction treatment with various restrictions and haircuts. Business traders with trader tax status benefit from business ordinary loss treatment. Taxpayers with Section 165 losses must wait for the loss to be “sustained”so trustees have ample time for fund recovery. MF Global futures account holders recovered their losses in full, although forex account holders may have some sustained losses. (Read our blogs, PFG investors can deduct theft losses on 2012 tax returns with Rev. Proc. 2009-20 safe harbor relief, and MF Global & PFG Best deposit losses have nuanced tax treatment.)

I imagine bankruptcy trustees for these failing forex brokers will seek to recover funds from customers who incurred forex trading losses in excess of their deposits, unless the account agreements say otherwise. I also envision there will be arguments over who bears responsibility for excess losses, the broker or customer in cases where brokers liquidated positions and sometimes too late.

Disregard of CFTC rules
Many American forex traders disregarded CFTC rules (for retail off-exchange forex) by trading with non-registered offshore brokers offering leverage far above CFTC limits of 50:1 on major currencies and 20:1 on minor currencies. Several offshore brokers and a few U.S.-based forex brokers are facing financial strain or insolvency as a result of offering excess leverage to their customers during the SNB shockwave. When markets are extremely volatile the broker and customer may not be able to exit a trade before incurring a significant loss well in excess of the customer’s deposit amount. Let’s see how the money protection issue works out offshore.

Forex Tax Treatment & Planning

September 7, 2014 | By: Robert A. Green, CPA

When it comes to taxes, forex traders can have the best of both worlds: ordinary loss treatment and lower 60/40 tax rates on gains.

Presented by Robert A. Green, CPA

Green explains forex tax and regulatory treatment, plus planning opportunities.
Read forex tax treatment in our Trader Tax Center.

Accounting Solutions

August 29, 2014 | By: Robert A. Green, CPA

When it comes to trading, it’s wise to do separate accounting for gains and losses vs. expenses. A consumer off-the-shelf accounting program is excellent for keeping track of expenses, non-trading income, home office deductions, and itemized deductions. But when it comes to trade accounting for securities, one may need a specialized software program or solution.

Futures gain/loss accounting may not be necessary, as traders generally can rely on the one-page 1099-B with summary reporting, using MTM reporting. For spot forex accounting, taxpayers can count on the broker’s annual tax reports and should use summary reporting. Spot forex is not a “covered security,” so there are no Form 1099-Bs.

U.S.-based cryptocurrency exchanges issue a Form 1099-K to taxpayers reaching a certain threshold of transactions, and most provide online tax reports. Consider a cryptocurrency trade accounting solution. (See Chapter 18 for my review of two cryptocurrency accounting programs and all the details on accounting for cryptocurrencies.)

Securities accounting is challenging

Securities brokers made advances in tax-compliance reporting due to Congressional legislation, and implementation of IRS cost-basis reporting regulations phased in between 2011 and 2017.

Taxpayers report proceeds, cost basis, wash-sale loss, and other adjustments, holding period, and capital gain/loss on Form 8949. According to the form’s instructions, taxpayers without wash sales and other adjustments to cost-basis may enter totals from broker 1099-Bs directly on Schedule D and skip filing a Form 8949. After all, the IRS gets a copy of the 1099-B with all the details.

But many taxpayers believe that they don’t have wash sales, when in fact they often have many to report to comply with IRS rules for taxpayers, which vary from rules for brokers.

See Wash Sale Losses and Form 8949 & 1099-B Issues.

If a securities trader has multiple brokerage accounts, including IRAs, and or trades substantially identical positions (stocks vs. options), then the trader should consider an IRS-compliant securities trade accounting program or service. We offer a trade accounting service.

Excerpt from Green’s 2019 Trader Tax Guide Chapter 4, Accounting for Trading Gains & Losses. 

 

Forex

| By: Robert A. Green, CPA

Forex transactions start off receiving ordinary gain or loss treatment, as dictated by Section 988 (foreign currency transactions). The good news is Section 988 ordinary losses offset ordinary income in full and are not subject to the $3,000 capital loss limitation — that’s a welcome relief for many new forex traders who have initial losses and offset the losses against wage and other income.

Section 988 allows investors and business traders — but not manufacturers — to internally file a contemporaneous “capital gains election” to opt-out of Section 988 into capital gain or loss treatment. This is a way to generate capital gains to use up capital loss carryovers, which otherwise may go wasted for years.

The capital gains election on forex forwards allows the trader to use Section 1256(g) treatment with lower 60/40 capital gains rates on major currencies if he doesn’t take or make delivery of the underlying currency. “Major currencies” means currencies for which currency RFCs trade on U.S. futures exchanges.

We make a case to treat spot forex like forwards for purposes of using Section 1256(g)…

Excerpt from Green’s 2019 Trader Tax Guide. There is significant content on forex tax and accounting in the guide.